SDCERS BOARD MEETINGS - June 18, 19, and 20, 2008
Reported by Patricia Karnes

Patti's Notes

I attended the Audit Committee, Business & Governance Committee and the full Board meeting. Investment Committee was cancelled due to lack of a quorum.
(Notes do not necessarily follow the order of the committees or the full Board meeting, they may be by subject. They are my understanding of what happened.
CDs of SDCERS' committees and Board meetings are available through the Board Secretary, visual recordings are available through City Channel 24. Live streaming will be available soon. Full Board meetings are on Channel 24 around 5 or 6pm, usually the third Friday of the month, and repeat on the following Sunday at 1pm.)

COMPARATIVE BALANCE SHEET- ten months ending April 30, 2008
(Part of Retirement Fund Financial Statements, cover letter June 4, 2008):
Net income is down, -40.85% due primarily to lower investment earnings and due to higher benefit payments in FY 2008 than FY 2007.

Mark Hovey noted that payments from plan sponsors are pretty much equaling administrative expenses and the benefits being paid out. There is no new capital for the fund to invest. Later, Wescoe pointed out that fees to money managers are down due to lower earnings.

Doug McCalla's June 19th's Staff Report-Executive Summary reported the funds value as $4.947 billion as of June 5th, unaudited. Benefit payments and operating expenses were $11 million.

WATERFALL AND CITY COUNCIL
This is what I understood after talking informally with SDCERS' legal counsels: Basically all balls are in the air.
1) The Waterfall payment plan is no longer a SDCERS item. Liabilities for Corbett, Supplemental Cola, 13th Check are now included in the City's Annual Required Contribution (ARC) to SDCERS.
2) Will Aguirre stop tinkering with legal agreements and payments? Aguirre's most recent Version B still eliminated some future payments.
3) Will the Council go with Version A that was prepared by the Independent Budget Analyst (IBA) and leave Aguirre out of the loop?
4) Will the Council continue to "continue" the Waterfall issue?
5) The SEC apparently expects the Council to eliminate the term "surplus earnings" from the Municipal Code before the end of FY 2008.

COMMENTS: WESCOE'S PERFORMANCE REVIEW in Closed Session
Joe Flynn pointed out Wescoe's fact filled reports, such as the 2 year progress report last month, his polite and singular style, and his defense of Board members. Joe was looking forward to the upcoming members meeting in September that Wescoe is planning. We will await Wescoe's next annual progress report, Joe said.

Patricia Karnes appreciated Wescoe going on Hedgecock's radio show and his ability to explain the difference between the City's actuary reporting SDCERS was over 100 % funded, versus SDCERS' actuary reporting SDCERS was approximately 80% funded. Wescoe said the City's actuary only counted members vested after 10 years with the City. SDCERS' actuary counted both vested members and those not yet vested, but paying into the system. Wescoe has been able to comprehend and explain complex problems honestly, she believed.

AUDIT COMMITTEE
The Audit Committee has 2 Trustees and 3 independent members who are knowledgeable in financial reporting issues.

(Please take a moment and write a thank you to Chair Armon Kamesar, Marilyn Brown and Michael Collins for being the first volunteers to do public oversight of SDCERS.)

Wescoe cheered on these three public members on the Board. Wescoe pointed out that it would be difficult to replace them, SDCERS had gained national recognition by creating public oversight, and their professional opinions were important to SDCERS' credibility.

Their duties include:
A) Oversee the annual audit of the System's Financial Statements and any other internal and external audits of the system.
B) Refer all audits results to the full Board for further action.
C) Recommend the issuance and timing of Requests for Proposals for selecting outside auditors, review Requests for Proposals and oversee the selection process.
D) Ensure the adequacy of internal controls.
E) Direct investigations, as appropriate; and
F) Perform other duties as directed by the Board.
G) Performance review of  SDCERS Internal Auditor.

Audit Committee Charter:
Internal Auditor Bob Wilson asked audit committee members to send in suggestions for their new Charter to be discussed at the next meeting. Marilyn Brown asked how the three public representatives on the committee will be replaced? Staggered 4 year terms was suggested. A quarterly meeting schedule, with special meetings to meet the Brown Act, will be prepared by the administration. It would be based on the annual cycle of outside audits, etc.

Comprehensive Annual Financial Report:
Wescoe pointed out the professional level that SDCERS' Comprehensive Annual Financial Reports have now achieved and the CAFR for June 2008 will be even better.

Five year contracts with outside auditors:
Wescoe said there are only 2 big auditors of large pension plans in California. Chair Armon Kamesar pointed out it is important that the staff of the outside auditor change to limit the familiarity with SDCERS.

NEW GENERAL COUNSEL FOR SDCERS
Elaine Reagan, who has been working on Chris Waddell's legal team, is replacing him. She said she has big shoes to fill when Waddell leaves at the end of the month.

Waddell will be returning to his family full time in northern California after spending 18 months commuting. Waddell said that he has spent 25 of his 28 years in public service and came to San Diego to help out public employee's retirements at a difficult time. He gave thanks for the caliber of the Board. He thanked President Hebrank for his contributions and praised the Executive staff as being up to CalPERS, etc.

(You may wish to write a letter thanking Chris Waddell for his service.)

Aguirre arrived for non-agenda comment to ask the Board to recognize Chris Morris as their General Counsel. Morris was the representative attorney for the Pension Reform Committee ( 3 hours a week for a year), he was hired by John Witt and has worked for the City for 15 years. Morris said he was not there in his City's criminal division capacity.
A SDCERS attorney countered Aguirre's argument for an attorney "independent" from the Board by pointing out that nothing has changed since Judge Barton made his decision for SDCERS to have an attorney independent of the City.

OVERPAYMENTS AND UNDERPAYMENTS - CORRECTIONS
Wescoe announced that this next year would be the "Year of Data". Aggressive steps are being taken to re-check for past mistakes, as SDCERS improves internal controls and updates records. David Arce said SDCERS is putting in double and triple checks. Expect more corrections than usual as SDCERS Board follows their "Duty to Keep the Fund Whole".

Cynthia Queen, Member Service Director, reported 890 members have registered on the web site. Members can now check their accounts themselves via SDCERS' new portal.

This is not the Purchase of Service issue that is in the court system, as a previous Board, under President Pierce, approved a price that is no longer in affect.

REPEAL OF BOARD RULES AND COMMITTEE CHARTERS
The Board continued to work on recommendations from SDCERS' legal staff  to update, repeal and re-organize some Board Rules and establish Charters for committees. 
Topics: Fiduciary responsibilities, prohibited actions, investment responsibilities, benefit responsibilities, duties of Officers, establishment of committees, Closed Session Policy, over and under payment policies, and authorized signatures.
Regarding removal of Board Members: Elaine Reagan said Trustees could only be removed by an appropriate agency, such as the Grand Jury, recommending removal and follow up by a District Attorney filing a civil action.

Susan Gonick asked what are the qualifications, if any, for a Trustee to be appointed to a committee? Waddell answered that this is debated in other systems, and hopefully they will find qualified people on the Board.

IRS TAX COMPLIANCE
Roxanne Story Parks reported the five year C-filing was completed by the deadline of June 9, 2008.
She added that on a national level, the IRS is now focusing on government pension plans. Other government pension plans have not been coming to the IRS for a Tax Determination Letter, as SDCERS has recently received.
Roxanne has started monthly tax training for staff.
(You may wish to write Roxanne and thank her for her tax work.)

GROUP TRUST
Mark Hovey reported State Street Bank, SDCERS' custodial bank, is assisting with apportioning assets between the three Trusts: City, Airport and Port. There is no physical separation of monies. The Bank tracks each Trust's publicly traded assets. SDCERS tracks private trades, such as real estate, and proportionately separates the assets.
How would assets be transferred if the Port was to leave SDCERS? Trustee Peter Preovolos, on telephone conference from his vacation spot, asked why the Port would receive cash for the real estate portion? Wouldn't this unbalance SDCERS' financial allocation plan, he inquired? Hovey responded that if the time was June 30/July 1 that the cash from sponsors' annual required contributions would be used. This would avoid significant administrative costs of shifting real estate.
The Board authorized Tom Hebrank, Board President to sign the Asset Transfer Memorandum of Understanding between the San Diego Unified Port District and SDCERS.

SDCERS INVESTMENTS IN IRAN
SDCERS will be discussing this with the Port.

SDCERS INVESTMENTS IN SUDAN
Three university students with good credentials and good research requested divesting an investment in a  $16 million contract for a dam in Sudan by a $79 billion Swiss company, because of Sudan's policy supporting genocide.

Steve Meyer pointed out (via phone), that there were current Board Rules against divesting due to social investing pressures, in part because of possible administrative/investment losses to the fund. He noted newer Trustees may wish to re-examine that Board policy.

The Board maintained the status quo by 8-4 vote.
Later the City Attorney, who was present at the time, pointed out what is happening in Sudan is violating international law and it was more than an ethical question. Why not invest in other illegal activities, if you think the Sudan investment is acceptable, he asked.

SawyerKnoll had prepared points that divestment was possible if it was determined it didn't undermine SDCERS financially, that members' interests were more than financial, and she requested the Investment Committee to review the divestment policy.

Sullivan asked what message was being sent to the Swiss company if SDCERS didn't vote to divest. Ethics was distinguished from emotion. Kennedy had great experience in discussing divestment on larger pension boards and said each situation must be treated individually, not as a policy. Thomson announced this country was built on civil disobedience and the Boston Tea Party wasn't legal or right.

Several Board members wondered where the borders of this issue began and ended, so they didn't want to re-consider divestment. Other found it emotional and wondered if any investments were possible if one considered "mortality out there". Another mentioned possible unintended consequences that could make the Sudan situation worse and said it was the Federal government's issue, not for pension boards.
Susan believed all members knew how they would vote and it need not go to the Investment Committee for further discussion. She believed SDCERS' investment managers could be trusted to decide on investments. Preovolos didn't like the Board being used politically.
Waddell concluded, pointing out that it was good to hear a full range of viewpoints and terrible things were happening in that country.

(If you have an opinion on social divestment, consider writing your support of that position to the Board so they have members' input.)

LINEA SOLUTIONS, INC CONTRACT
Board asked for more information. This item will return in July.